The FTHBI won’t improve housing affordability in the Greater Toronto Area

Right before the federal election, Canada’s First-Time Home Buyer Incentive will kick into action, making it easier for thousands of buyers across the country to dive into the market.

I have mixed feelings about the FTHBI. On one hand, I believe in the shared equity mortgage model because of Options for Homes’ success in the Toronto area. Then on the other hand, I’m questioning how much of a difference the program will actually make when it comes to improving housing affordability.

Through the Canada Mortgage and Housing Corporation, the feds are giving qualifying first-time buyers a 10% loan to go towards a down payment. For example, if the home is $400,000, then the loan will be for $40,000. The 10% only applies to new construction homes to encourage the creation of more supply. For existing homes, the loan will be for 5% of the purchase price.  

The repayment is based off the selling price or home value at the time of repayment. If you received a 10% loan, then at the time of repayment, you’d pay 10% of the selling price or home value. So, if the home you bought for $400,000 years later sold for $500,000, then you’d pay back $50,000 as opposed to the $40,000 you originally received. Same goes for if your home value drops. CMHC is sharing the equity, so it’s also sharing the risk. 

According to the CMHC, more than 2,000 buyers in Toronto would have qualified for the FTHBI in 2018. While the program will help some middle class Canadians buy a home, I feel like it will actually drive prices up a little bit. 

A friend of mine bought a new condo in downtown Toronto in 2016, and they just closed on it this year. When they bought, the price per square foot was around $650. They could easily sell today for around $1,000 a square foot. The value has increased by more than 50%. This time period did see a spike in average prices for new homes in the GTA, but who’s to say that doesn’t happen again. 

If they took the loan of say $35,000, then they’d owe the CMHC around $55,000 if they sold today or later this year, and they’d probably owe even more if they sold next year because the value is going up in the downtown area. At this price point, the FTHBI is only saving them around $2,400 a year in mortgage payments. Why take a loan to save $7,200 over the course of three years if there’s a chance you’ll end up owing tens of thousands when you sell? 

I’m using my friend’s purchase as an example because it shows that the FTHBI only makes sense for people who are so close to qualifying for a mortgage that saving $200 a month is the thing that gets them in the door. If you can buy without the FTHBI, then buy without it.  

So, the government of Canada is giving more buying power to people on the edge of affording a home, which will just drive up sales activity even more. They even committed to larger loans for new construction in order to encourage the creation of more supply, but demand isn’t the problem. 

In the GTA, strong demand and a lack of supply in the new home market is a significant factor impacting average price increases. If 2,000 more buyers that otherwise wouldn’t be there are suddenly eager to buy a home, then it will just fuel price growth. 

Looking at the big picture, I don’t actually think prices will be affected that much by the FTHBI (CMHC says the inflation effect will be 0.2% to 0.4%), but this doesn't change the fact that it does nothing to improve housing affordability in the GTA.